Financialmanagement knowledge is vital in an organization because it can helpan organization in growing its resources since it ensures efficientplanning and use of resources (Arwinge, 2013). Most organizations arebound to fail in case they lack individuals who have financialmanagement knowledge because resources of such organizations fail toplan and utilize their resources in the most efficient manner. Also,in such organizations, internal control systems may be poorlydesigned such that the organizations may lose their resources throughfraudulent activities. In this paper, different issues facing DurangoManufacturing Company will be discussed and recommendations offered.
Accountingand management knowledge are exceedingly critical to any business.Financial management knowledge is critical to business because ithelps the owners of business in making significant decisions in themanagement of a business’ finances. Without financial managementknowledge, it would be remarkably difficult to make a business orcompany succeed. In companies where financial management knowledge islacking, owners and other stakeholders such as suppliers are likelyto face problems since they may end up losing instead of gaining frombeing part of an organization. Accountants and managers must be in aposition to manage the resources of an organization well since poorfinancial management may result in the downfall of the organization.For instance, an organization where the management lacks anyfinancial management knowledge, resources would be mismanagedresulting in problems such as payment problems to the employees.Having accounting knowledge is an important aspect to an organizationbecause it can help an organization in preventing frauds that may barthe opportunity of the organization from succeeding. Theestablishment of SOX policies is an important consideration fororganizations since it helps in seeing the vitality of havingaccounting knowledge. Without proper accounting knowledge, it wouldresult in an organization facing law suits because it would bedifficult for an organization to follow the provisions of accountingpolicies. Therefore, in order for an organization to succeed, it isvery important for the management to have accounting and managementknowledge that would aid in planning for an organization’sundertakings. Hence, in case Durango Manufacturing desires to attainfinancial stability for the next five years, it would be of immenseimportance to put individuals in the management who have accountingand management knowledge this would assist in the utilization of thecompany’s resources with efficiency.
Differentstakeholders have varied use of financial statement information.Thus, investors, employees, and lenders will use the financialstatement of the company differently. Investors will use thefinancial statement information and ratios of Durango Manufacturingin establishing the feasibility of investing in DurangoManufacturing. Investors have to ensure that they will be capable ofearning a reasonable return in an organization before committing anyfinancial resources to an organization. Therefore, investors will usefinancial statement information and ratios in predicting whether itwill be worth investing in Durango Manufacturing in case thefinancial statement information and ratios do not show any financialstrength or future profitability, it would be hard for investors toinvest in such a company.
Inthe case of employees, they would use the financial statementinformation and ratios of Durango in establishing whether it would bepossible for Durango to afford the employees job security in thefuture and good packages. In case the financial statement informationand ratios of the organization indicate that the company is likely tobe profitable in the future, then the employees of Durango would havehope in having job security in the future. However, in case thefinancial statement information and ratios of the company do not showany indication of future profitability, then the employees would knowthat there is low probability of job security in the company.Alternatively, lenders would use the financial statement informationand ratios of Durango in establishing whether the organization wouldbe in a position to pay for its obligations. Lenders would need toestablish whether the organization is credit worth. In case thefinancial information and ratios of the company indicate that thecompany has the potential of paying its liabilities, then lenderswould have confidence in lending resources to the company.
Itis important to evaluate whether a capital budget will be capable ofdelivering proposed revenues within a given timeframe. Given thestrategy to increase its revenues, Durango can use net present valuein evaluating whether the proposed strategy would be in a position toincrease revenues within the five year plan. The net present value isan investment evaluation technique where the present value of allfuture cash flows are calculated using an appropriate discount rate,and these values added together and initial outlay deducted so as toestablish the value of the investment. This value provides the profitin present terms in case the value is positive, there is anindication that the investment has a good signal. However, in casethe value turns out to be negative, then there is an indication thatthe proposed investment has a bad signal. The reason why net presentvalue technique should be used by Durango is that the discount ratethat will be used can be customized so as to reflect differentfactors prevailing in the market such as the risk that is in themarket. Also, another reason why Durango should consider using thenet present value in evaluating the proposed strategy of increasingrevenues is because the technique has an advantage in that it gives adirect measure of the value of dollar contribution towards thestockholders. Furthermore, with the net present value approach, thereis the advantage of avoiding obtaining conflicting answers formutually exclusive projects (Hansen et al., 2009). Therefore, DurangoManufacturing should consider the use of net present value approachin evaluating whether the proposed strategies would be in a positionto increase its revenues.
Operationalefficiency is crucial to an organization and can be implemented inDurango. In its organization, Durango can use process, job order andactivity-based costing in its production departments. Process costingusually involves the accumulation of costs in lengthy production runsand involves products that cannot be distinguished from each other.The best department, where process costing should be used in DurangoManufacturing is the production line department, where commoditiescannot be easily sorted out. The reason why this department should beinvolved in process costing is because costs are likely to beaccumulated at the lower level of the organization where sortingcannot be easily handled. The accounting department would also beinvolved in process costing since the department is usually involvedin planning for the costs that would be incurred by the organization.Thus, the accounting department has to use process costing inestablishing the accumulated costs. Alternatively, job order costinginvolves a detailed accumulation of production costs that areattributed to given units or group of units. Job order costing can beused in the sales department of Durango Manufacturing. The reason whyjob order costing should be used in the sales department is becausejob order costing can be utilized in producing bills to customersassociated with items made for customers. On the other hand,activity-based department entails a costing approach which identifiesactivities in an entity and assigns the cost of every activity withresources to all services and products according to the realconsumption by each activity. In Durango Manufacturing,activity-based costing should be used in the finance department. Thereason why activity-based costing should be used in the financedepartment is because the finance department deals with allocatingavailable resources to activities that an organization deals with.Since activity-based costing involves assigning of costs to everyactivity that an organization deals with in its production, then thefinance department is well-placed to deal with this approach.
Outsourcingis a common aspect that is being considered by most organizations inthe modern world of business. Outsourcing concerns the process ofassigning an organization’s business processes to the externalagency in an attempt to enhance service quality or deriving reducedlabor cost (Click & Duening, 2005). Thus, the process ofoutsourcing comes with benefits and due to this the CEO of Durangoshould go ahead and consider outsourcing his manufacturingoperations.
Oneof the benefits that Durango Manufacturing would have by consideringoutsourcing the manufacturing operations is reduced. Throughoutsourcing the manufacturing operations, the organization would bein a position to obtain cheaper labor. Since the management of theorganization can offer job to contracted employees throughoutsourcing instead of employing full-time or part-time employees,the company would save some resources that can be used in handlingother activities of the organization (Ashley, 2008).
Anotherbenefit of the organization considering outsourcing is that theorganization would have enhanced management, which is critical forcreating a competitive advantage for the business (Ashley, 2008).Through outsourcing, the organization would help in freeingmanagement time making the company focus on its key competencieswhile not paying much attention to outsourced responsibilities oractivities. This is of immense importance to the organization sinceit would be capable of carrying its operations with improvedmanagement since the management would not have a lot part to play inthe outsourced activity this would automatically create acompetitive edge for the business.
Apartfrom this, through outsourcing, the organization would benefit frombetter resource management, improved revenue realization and improvedreturns on investment (Ashley, 2008). Through outsourcing, theorganization would have the opportunity of tapping knowledge thatwould be used in bringing innovations to the organization a movethat would help in realizing improved revenues and returns oninvestment. Also, resources would be utilized in a better mannersince they would be applied efficiently to the organization’sprocesses due to reduced cash outflow.
Economicand business environment are exceedingly important to a businessbecause they help in determining whether a business will realize itsgoals or not. This is because economic and business environmentinfluences the manner in which a business would conduct itsoperations. Over the next five years, the economic and businessenvironment may affect the way the organization would carry itsoperations, thus affecting the ability of the organization reachingthe desired 10% revenue growth. One of the business environments thatmay have an influence on the growth of Durango’s revenue is anincrease in the number of organizations in the area of theorganization’s field of doing business. An increase in the numberof businesses dealing with similar commodities as Durango mayincrease competition in the business, which may limit the ability ofDurango realizing the 10% growth in revenues especially in case theemerging businesses have a competitive edge over Durango.
Also,within the next five years, the cost of labor may become veryexpensive. A shortage in labor is likely to have an impact ofincreasing the cost of hiring employees this would have an effect ofincreasing the cost of production (Albrecht et al., 2011). When thepredicted cost of labor increases within the five year period, theorganization may have an impediment in its ability to attain thedesired 10% revenue growth due to an increase in the operating costs.
Furthermore,an increase in taxation may also have an impact in the ability of theorganization in attaining the proposed 10% increase in revenue. Anincrease in taxation as a result of change in tax laws may make thecompany not realize its desired target within five years since highertaxation would imply that the organization would be required to paymore that it had planned, which would reduce the revenues that theorganization has projected over five years. Moreover, an increase intaxation would result in an increased cost of raw materials used bythe organization. This would imply an increase in the operatingcosts a move that would result in reduced projected earnings for theorganization (Bendrey et al., 2004).
Inorder to attain its goal of increasing its revenues by 10% withinfive years, Durango would need to focus on its management, employeesand internal control. The organization should first of all center onhiring highly competent individuals in its managerialresponsibilities. This would be a critical idea since it will ensurethat all the activities of the organization are carried out withefficiencies. When the management will have the right individuals, itwill be feasible to plan and organize the resources of theorganization towards revenue growth.
Afterensuring that the organization is being driven by the rightindividuals in the managerial level, the organization should ensurethat it employs competent employees in its production line and ensurethat these employees are highly-motivated. Hiring employees that arecompetent enough in the productions line of the organization wouldensure that the organization ensures quality production, which iscritical in the development of a competitive edge. Also, through thecompany ensuring that its employees are highly-motivated, it wouldcreate an opportunity for innovation which would definitely help theorganization in offering quality products (Bendrey et al., 2004).Thus, hiring competent employees and motivating them can help theorganization in realizing growth in revenues.
Furthermore,the organization should also enhance its internal control in order torealize its goal of increasing its revenues. Through strengtheningits internal control, the organization would be in a position todiscover any loss of revenues and ensure the efficient use ofresources this would aid in increasing the revenues of theorganization (Biene-Hershey & Strous, 2000).
Withinthe first year, the organization should hire competent employees inthe managerial role. This would help the company in efficientmanagement of different responsibilities. More so, the organizationshould ensure that it hires a competent person who has knowledge inthe area of financial management. Such an employee will assist thecompany in developing a strong internal control system. After hiringcompetent employees, the company should motivate the employees with acombination of non-monetary and monetary incentives. These measureswould assist the company in realizing its goal within duration offive years.
ITcontrols have become important tools in ensuring that frauds aredetected early. For example, the use employee tracking systems havemade it easier to monitor the manner in which employees handle theirresponsibilities, making it easier to discover frauds. It is likelythat lack of IT controls within the Durango Company may result infrauds within the organization. This is because lack of IT controlsmay make workers become tempted to engage in fraudulent activities.
Durangomay structure its internal IT control by installing monitoringsystems in every part of the company especially in rooms where thereis exchange of money. This would help in strengthening the company’sinternal control system, which would help in detecting fraudulenttransactions. Also, the company may structure its IT control systemssuch that the people that operate the systems become rotatedregularly. This would be important in the detection of fraud sinceindividuals who operate the IT control systems would not have anopportunity of planning how they can engage in fraudulent activities.In addition, the IT control systems should be structured such thatthey are protected with passwords and in secured rooms.
Internalcontrols are very important when it comes to any business becausethey help in the detection of frauds and efficient utilization of acompany’s resources. Ethical considerations in the governance of anorganization help in the detection as well as elimination offraudulent activities. From the scenario facing Durango Company, itis evident that the company wants to increase its revenues by 10%over a five-year period, but the CEO of the company has limitedknowledge on the issue of financial management as well as creatingvalue for the different stakeholders. It can be recommended that thecompany should focus on hiring employees that are competent enough inboth the management and in the line of production. Also, in order toaccomplish its goal, it should focus on developing a strong internalcontrol system that is based on ethical considerations. The internalcontrol that would be developed by the organization would help indetecting as well as curbing loss of resources. Furthermore, itshould be recommended that the organization should offer motivationto its employees for increased productivity so as to reach itstarget. Moreover, it should be recommended that the CEO of thecompany should outsource the manufacturing operations since thiswould bring different benefits to the organization and aligns withthe aim of the organization.
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